Thursday, April 26, 2012

The
European Commission's Communication Department, Europa, recently released its
debt and deficit data for all of 2011. In this posting, I'll hit a few of
the high points showing how this turbulent year in the Europe has impacted
government debt levels.

First,
it's important to note that, as part of its original mandate, countries in the
Eurozone set up debt and deficit targets and a mechanism that dealt with
nations that exceeded these targets back in 1999 when the euro was created. Almost
laughably small in today's terms, here are the two criteria by which Member States were forced
to abide under threat of sanction:

1.)
The budget deficit must not exceed 3 percent of gross domestic product.

2.)
Public debt must not exceed 60 percent of gross domestic product.

If
Member States exceeded these guidelines, the European Commission wielded a wet
spaghetti noodle of threatening actions termed the Excessive deficit procedure or EDP. Here is a list of
ongoing excessive deficits that are being reviewed, the date of the EC report
and the deadline for correction in the last column:

Notice
how the gap between the initial finding of excessive deficits and the deadline
for corrective action can be several years.

Now,
back to the latest annual EC debt and deficit data. For your information,
the term EA17 stands for the 17 nations that currently use the euro as their
currency and the term EU27 includes those nations plus all other nations in the
European Community that do not use the euro (i.e. the United Kingdom among
others).

In
2011, the level of government deficit-to-GDP ratio in the EA17 decreased on a
year-over-year basis from 6.2 percent in 2010 to 4.1 percent in 2011. In
the EU27, the deficit-to-GDP ratio decreased on a year-over-year basis from 6.5
percent in 2010 to 4.5 percent in 2011. Note that both levels are still
well above the deficit limit of 3 percent as noted above.

In
2011, the level of government debt-to-GDP was not as co-operative. In the
EA17, government debt-to-GDP rose from 85.3 percent at the end of 2010 to 87.2
percent at the end of 2011 and in the EU27, government debt-to-GDP rose from 80
percent at the end of 2010 to 82.5 percent at the end of 2011.

The
raw numbers are also interesting. Total government deficit in the EA17
fell from €571,050 million to €387,617 million, a drop of €184,433 million or
32 percent. Nonetheless, total government debt in the EA17 rose to a new
record of €8,215,289 million ($10.679 trillion), up 4.8 percent from the
previous year. Total government deficit in the EU27 fell 30 percent on a
year-over-year basis €565,117 million. Total government debt in the EU27
rose by 6.2 percent to €10,421,987 million ($13.55 trillion). This
represents roughly one-third of the world's entire stock of public debt
according to the Economist's global debt clock.

Here
is a chart summarizing the growth in debt and changes in deficits since 2008:

It
is interesting to look through the details of the report and find that even
Germany, the pillar of fiscal prudence, has a debt-to-GDP ratio of 81.2
percent, well in excess of the 60 percent target. The worst debt offender
is Greece with a debt-to-GDP ratio of 165.3 percent at the end of 2011. Out
of the 27 EU27 nations, only 13 are under the 60 percent debt-to-GDP target and
these consist mainly of the former Iron Curtain countries and Scandinavia. Surprisingly,
in light of the Greek debacle, Ireland is the worst offender on the spending
side, ringing in a massive 2011 deficit of 13.1 percent of GDP. Only 10
of the 27 EU nations have a deficit-to-GDP ratio that is below the 3 percent
target, again, mainly the former Iron Curtain countries and Scandinavia. This
does not particularly bode well for the future since many of these nations had
deficit spending that exceeded guidelines during and after the Great Recession
of 2008 - 2009. As well, if the impact of low debt-to-GDP ratios of the smaller economies of the former Iron Curtain countries were subtracted from the average debt and deficit-to-GDP numbers, the situation would look far, far worse.

After reading and hearing so much about the Eurozone debt
crisis over the past 18 months, it is interesting to see it all put into
context. What is concerning is that, while the growth in deficit spending
seems to be improving marginally, the level of indebtedness marches ever
higher. Fortunately for most governments (the PIIGS nations excluded),
interest rates on sovereign debt remain at generational lows. Should
interest rates begin their march back to normal levels, it will be almost
impossible for even the most prudent of nations (i.e. Germany), to keep their
spending levels from growing faster than their revenues.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.